The solar industry has been in the limelight since early 2020, thanks to increasing concerns regarding climate change and the joint effort of countries worldwide to reduce carbon emissions by going green. The Biden infrastructure passed a landmark $1.2 trillion infrastructure spending bill earlier this year that includes significant investments to boost the domestic solar industry and contribute to reaching zero-carbon emissions in power generation by 2035.
However, given skyrocketing inflation and rising fuel prices, the Biden administration recently announced a strategic oil reserve release of one million barrels per day. This is expected to keep gas prices at bay, thereby driving up fuel usage. In addition, given the assorted macroeconomic headwinds and a potential recession warning, the government is expected to focus on more keeping the economy running rather than meeting its carbon emission reduction goals for now.
Because the solar industry is expected to remain under pressure for some time, overvalued stocks are expected to lose momentum further in the near term. Given these factors, we think fundamentally weak stocks SolarEdge Technologies, Inc. (SEDG), SunPower Corporation (SPWR), and Sunnova Energy International Inc. (NOVA) are best avoided.
SolarEdge Technologies, Inc. (SEDG)
SEDG in Hod Hasharon, Israel, provides an inverter solution for a solar photovoltaic (PV) system. It offers power optimizers, inverters, communication devices, smart energy management solutions used in residential, commercial, and small utility-scale solar installations, and cloud-based monitoring software. The company operates through five segments: Solar; Energy Storage; e-Mobility; Critical Power; and Automation Machines.
On March 17, SEDG proposed a secondary public offering of two million shares, with an underwriter allotment option to purchase an additional 300,000 shares. This offering should significantly dilute SEDG’s share capital, reducing shareholder returns and ROE.
In its fiscal 2021 fourth quarter, ended Dec. 31, 2021, SEDG’s total operating expenses increased 24.6% year-over-year to $119.45 million. The company's non-GAAP gross margin fell 2.2% from the year-ago value to 30.3%.
SEDG is relatively overvalued compared to its peers. In terms of forward EV/Sales, SEDG is currently trading at 5.55x, which is 79.9% higher than the 3.09x industry average.Its 5.74 forward Price/Sales multiple is 77.7% higher than the 3.23x industry average. And its 9.06 forward Price/Book ratio compares with the 4.76 industry average.
The stock has declined marginally in price over the past month to close yesterday's trading session at $308.
SEDG's POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, which equates to Sell in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.
SEDG has a D grade for Value, and Stability. Within the F-rated Solar industry, it is ranked #6 of 19 stocks.
To see SEDG's POWR Ratings for Growth, Momentum, Quality, and Sentiment, click here.
SunPower Corporation (SPWR)
SPWR in San Jose, Calif., is a solar technology and energy services provider that offers solar, storage, and home energy solutions in the United States and Canada. It operates through four segments: Residential; Light Commercial; Commercial; and Industrial Solutions. SPWR’s product portfolio includes Equinox, Helix, SunVault, OneRoof, and InvisiMount residential mounting systems.
On April 2, the company had a staff layoff in San Jose due to its ending of a research partnership. SPWR sold its commercial and industrial business in February for $250 million to TotalEnergies SE (TTE). This disinvestment is expected to impact the company’s revenues and earnings in the near term.
SPWR's total operating expenses increased 60.4% year-over-year to $82.11 million in its fiscal fourth quarter, ended Jan. 2, 2022. SPWR’s gross profit declined 32.1% year-over-year to $51.05 million. The company’s net income decreased to $20.99 million, registering a 95% decline year-over-year. Its net loss per share attributable to stockholders came in at $0.11, representing a 94.7% decline from the year-ago value.
SPWR is trading at a premium to its peers. In terms of forward EV/EBITDA, SPWR is currently trading at 37.60x, which is 203.8% higher than the12.38x industry average. Its 7.49 forward Price/Book multiple is 57.3% higher than the 4.76x industry average. SPWR’s 37.39 forward Price/Cash Flow ratio compares with the 18.36 industry average.
In its fiscal first quarter (ended March 31, 2022), the Street expects SPWR's EPS to decline 49% year-over-year. It is no surprise that SPWR has missed the consensus EPS estimates in three of the trailing four quarters.
Shares of SPWR have declined 25.2% in price over the past year, to close yesterday's trading session at $21.36.
SPWR's POWR Ratings reflect its poor prospects. The company has an overall D rating, equating to Sell in our proprietary rating system.
SPWR has a D grade for Stability and an F grade for Value and Sentiment. It is ranked #10 of 19 stocks in the Solar industry.
To see additional POWR Ratings (Growth, Momentum, and Quality) for SPWR, click here.
Sunnova Energy International Inc. (NOVA)
NOVA in Houston, Tex., is a residential solar and energy storage service provider. It offers operations and maintenance services, monitoring, repairs and replacements, equipment upgrades, and onsite power optimization for its customers. As of Dec. 31, 2021, it operated a fleet of residential solar energy systems with a generation capacity of approximately 1,140 megawatts serving more than 195,000 customers.
On February 1, NOVA expanded its partnership with Generac Power Systems, Inc. (GNRC) to offer energy storage units, standby home generators, microinverters, and load managers for its consumers.
In its fiscal fourth quarter (ended Dec. 31, 2021), NOVA’s total operating expenses rose 32.3% year-over-year to $74.08 million. The company's net loss and net loss per share came in at $31.26 million and $0.13, respectively.
NOVA is relatively overvalued compared to its peers. In terms of forward EV/Sales, it is currently trading at 17.25x, which is 270.3% higher than the 4.66x industry average. Its 48.71 forward EV/EBITDA multiple is 297% higher than the 12.27x industry average. Its 6.99 forward Price/Sales ratio compares with the 2.64 industry average.
Analysts expect NOVA's negative $0.31 earnings per share to decline 15.3% year-over-year for the fiscal first quarter, ended March 31, 2022. The company has missed the consensus EPS estimates in three of the trailing four quarters.
NOVA stock has declined 47.2% in price over the past six months.
NOVA's POWR Ratings reflect this bleak outlook. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system. It has a grade of D for Growth and an F grade for Value, Stability, and Quality. It is ranked #17 of 19 stocks in the Solar industry.
Click here to see NOVA's POWR Ratings for Sentiment and Momentum.
SEDG shares were trading at $303.15 per share on Thursday afternoon, down $4.85 (-1.57%). Year-to-date, SEDG has gained 8.05%, versus a -7.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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